It’s easy to predict the “death of crypto.” Over the last few months, trust in the crypto industry has declined due to bad actors, and the long downturn in cryptocurrency prices, otherwise known as the “crypto winter.” These factors undermine the long-term adoption of digital currencies and financial assets. However, the original opportunity of blockchain technology still holds.
The goal of cryptocurrencies and decentralized finance (DeFi) is to reduce barriers to financial inclusion for the masses through technology that removes the challenges that exist for users of current centralized financial institutions. DeFi is accessible to anyone with an internet connection, offers low fees and often high interest rates, offers security and transparency, and full autonomy to users.
Sounds good in theory, doesn’t it? Yet if you are new to crypto or merely “crypto-curious,” the learning curve to access truly decentralized finance isn’t just steep, it’s practically vertical. Quite simply, many of the current applications are too hard for most people to use. There are many steps you need to go through to deposit fiat currency, you have to come to grips with self-custody of assets, and these applications do not have the user interface for mass adoption. Consumers are rightfully in need of a more simplistic and user-friendly option. To help, many crypto-curious have moved to custodial products.
Briefly put, the difference between custodial and non-custodial solutions is simple. Custodial solutions utilize centralized technology to store user assets in one place, allowing for more simplistic security measures within the application as those operations are taking place with a third party. Non-custodial solutions hold users’ individual security data within their platforms themselves, ensuring that no third-party involvement occurs. While this is more aligned with the goal of complete decentralization, putting individual users in charge of complicated security protocols can make their experience much more complex.
To put the pitfalls of non-custodial solutions into perspective, it is estimated that almost 20% of Bitcoin is lost due to users not remembering their seed phrase, the very long and complicated security phrase that is used to log in. Forgetting or misplacing this phrase means you can be locked out of your assets forever, as non-custodial platforms have no authority to reverse user actions or support users when a mistake is made. In addition to the inconvenience of remembering seed phrases, there are a number of other drawbacks to non-custodials. Trading can take longer as every transaction takes place on the blockchain, rather than in one centralized location. Trading can also be less private as the blockchain is known for its extreme transparency. Finally, trading on non-custodial platforms can be costly with extra transaction fees that are common within the crypto space.
A crucial part of generating crypto adoption is building transparency and trust. This can be a point of contention for custodial solutions as recent events, such as the collapse of high-profile players such as FTX, BlockFi and Celsius, have tarnished the concept of centralization as a stepping stone to a fully decentralized economic ecosystem. Custodial wallets, when integrated with top-notch operational due diligence and operating under a credible regulatory regime, allow users to easily embrace crypto while offering a high level of comfort that their assets are safe and secure.
We believe that the industry is able to strike the balance between operability and security in several ways. The first and arguably the most important at this moment in time is radical transparency. Software that allows customers to see where their assets are located at all times is a must, and unfortunately it has been a novel feature in the general crypto landscape. There should be no veil of secrecy between customers and their personal finances. In addition, it is important to ensure that all trading takes place within regulated environments, and that customer assets are never used for borrowing and lending activities without their consent.
Finally, despite conflicting views on third-party custodians, the security and reputation of a platform can be accredited to investing in the most trusted providers of digital asset security on the market. Using trusted custodians provides security for investors against cyber attacks, internal collusion and human error, freeing capacity for a better user experience on the main platform. By ensuring customer funds are secured by an independent third party, and providing customers live access to where their funds are, we can reduce concerns about opacity and bad actors in custodial providers.
As pioneers at the forefront of Web3 and DeFi mass adoption, we have to be conscious of the sector of the market that is eager to enter this space, but unfamiliar with the technicalities of doing so. Providing a safe and easy way for customers to invest in cryptocurrency is the only way we are going to see large-scale adoption of this technology.